The stark economic conditions facing business, combined with recent political turmoil, have resulted in a large drop in optimism, with companies exposed to financial challenges including high inflation, ongoing recruitment difficulties and slowing domestic sales, according to ICAEW’s latest Business Confidence Monitor (BCM) for Q4. Input and labour costs have also continued to rise, while investment is set to slow as profits growth is squeezed.

The BCM, which surveys 1,000 chartered accountants in the UK, puts confidence at -16.9 on the quarterly index, the weakest since Q4 2020, and down sharply from -5 in the previous quarter. Confidence has fallen significantly since its recent peak of 47 in the third quarter of 2021, and is weakest among construction and retail firms.

Michael Izza, ICAEW Chief Executive, said: “It comes as no shock that business confidence has fallen back to levels last seen during the pandemic, as companies across the UK struggle to cope with ongoing economic, financial and political pressures.”

Ahead of Thursday’s Autumn Statement, Izza said it was imperative that the government outlines a plan to restore confidence, generate environmentally sustainable long-term economic growth, and bring opportunity and prosperity to the UK’s communities and regions.

“It is also vital that government provides clarity on energy support schemes beyond April, to bring certainty to businesses,” Izza added.

Financial distress increases 

The results of the latest BCM flagged up traits of rising financial distress within the economy; an increasing number of companies said they faced growing difficulties from late payments to access to capital and bank charges.

One in five businesses said late payments were a growing challenge, with SMEs and businesses in the energy, water and mining, and property sectors particularly hard hit, the report found. 

The same proportion – one in five businesses – highlighted access to capital as a problem, the highest proportion since Q1 2013, suggesting growing reluctance among investors and lenders to lend money as concerns about looming recession and increased uncertainty grow. One in three property businesses cited this as a growing challenge, higher than in any other sector. As the corporate sector begins to feel the brunt, the proportion of companies reporting problems with bank charges also increased. 

“The warning lights of recession are flashing red on most indicators, reflecting record cost pressures and the chilling effect of persistent political and economic uncertainty,” said Suren Thiru, Economies Director for ICAEW. “Construction endured an especially difficult quarter as rising interest rates, prolonged uncertainty and inflation weighed on activity. Retailers are also feeling the brunt of the current headwinds as people cut back on spending.”

Record inflationary pressures

Driven by higher labour and input costs, selling price inflation reached another record high. Input price inflation was also at its highest rate since the BCM began in 2004, reflecting the surge in energy costs and ongoing supply-side disruptions businesses faced.

Thiru added: “Historically high input costs for businesses, and the marked acceleration in wage pressures, suggest that inflation could stay higher for longer than the Bank of England predicts. 

“The notable uptick in difficulties in accessing capital and from late payments is concerning as it diminishes cash flow, leaving firms more exposed to external shocks, including a surge in energy costs as government support expires.”

Salaries also grew year on year at a rate not surpassed since late 2005, while a similar rise is expected next year. This wage hike can be partly explained by the tightness of the labour market, as well as higher inflation, with the availability of non-management skills and staff turnover remaining the most widespread problems for businesses. 

Sales growth slows

Domestics sales increased year on year at a slower rate than in the previous quarter, as companies struggled with higher interest rates and growing consumer demand. Domestic sales growth is forecast to continue slowing in the year ahead. More companies have above-normal levels of raw materials and components than at any time since the BCM started, putting significant upward pressure on their costs. 

Though smaller in scale, export growth fared better than domestic sales and is expected to rise in the next 12 months, most likely because prominent issues such as port delays, Brexit regulation, driver shortages, supply-chain difficulties and restrictions on trading with China, have eased. Weaker sterling may also have prevented exports growth from slowing, ICAEW said. 

However, with weaker domestic sales, employment growth is slowing and is expected to flatten in the year ahead, potentially easing pressure on salary increases.

Investment outlook bleak

Profits growth weakened for a second successive quarter to 4%, against a backdrop of rising costs and declining domestic sales growth. 

As a result, growth in capital investment has moderated with decade-low increases expected in the year ahead, which could affect the productivity and competitiveness of businesses operating in both domestic and global markets. 

Business confidence negative across UK

All regions and nations posted a negative confidence reading in Q4, with businesses in Yorkshire and Humber and Wales the least optimistic. Welsh businesses are among the most export-intensive in the UK but had the weakest outlook for export growth in the year ahead.

Companies in Yorkshire and the Humber’s manufacturing sector were exposed to a surge in global energy and commodity prices and have seen the sharpest rise in input costs over the past 12 months. 

London, meanwhile, was the least negative part of the UK. The capital has seen a slightly slower rise in input costs than the rest of the UK. 

Click here for the full report: ICAEW’s UK Business Confidence Monitor Q4 2022

Visit ICAEW’s Inflation hub for a closer look at the impact of inflation on people, businesses, accountancy and the wider economy.